Bumpy start for the reporting season

The reporting season is gathering speed but has presented a mixed picture so far – some market expectations have been beaten but others have not. Given the high level of inflation and exchange rate fluctuations, the markets’ consensus estimates of profit for 2023 are still likely to be too optimistic as things stand.

The major US banks JP Morgan and Morgan Stanley marked the height of the reporting season with the presentation of their quarterly reports. If the results were a test of what is to come, the outcome was underwhelming. JP Morgan’s profit fell short of market expectations due to weak investment banking, among other things. However, interest income has swelled on the back of higher interest rates. The major bank is now temporarily halting its share buybacks in order to “allow maximum flexibility,” it said. Jamie Dimon, Chairman and Chief Executive Officer of JP Morgan, noted that the employment market and consumption remained robust but geopolitical tensions, a high level of inflation, concerns about how high interest rates might go and the repercussions of the Russian invasion of Ukraine were highly likely to have a negative economic impact going forward. Its share price was down more than 5 per cent at times on 14 July 2022 and closed 3.5 per cent lower. Morgan Stanley also fell short of expectations but its shares were only 0.4 per cent lower at the close of trading. By contrast, the quarterly figures announced by Citigroup on 15 July 2022 surpassed market expectations and its stock subsequently shot up, taking the entire US banking sector with it.

Tensions are running high: the spike in inflation, uncertainty surrounding the future of energy supply and (geo)political risks are making it hard for many companies to make reliable forecasts. The chemical company BASF, for example, confirmed its outlook on the basis of its good figures but highlighted the raging uncertainty and poor visibility ahead. Given the soaring prices of various commodities and other input materials, investors are hoping the reporting season will give them an idea of how well businesses will be able to pass on the higher input costs to their customers. This desire for transparency will likely be hard to fulfil.

The company reports presented to date are painting a mixed picture. In the semiconductor industry, Micron and Taiwan Semiconductor Manufacturing Co. (TSMC) have published their reports. TSMC reported robust figures for the quarter just ended and raised its revenue forecast for this year as a whole but also announced that it would be cutting investment by 9 per cent compared with its original plan as a result of the uncertain consumer outlook in the electronics business. However the current figures indicate that smartphone business, for example, where the US provider Apple is a key customer, remains relatively robust. A week previously, Samsung Electronics had already announced better-than-expected revenue figures.

But that does not allay fears that the chip industry could come under further pressure in a recession. At the end of June, US-based Micron slashed its revenue forecast for the current quarter so drastically that it was more than a fifth lower than the market expectations. The capital markets are expecting to see a substantial overall reduction in inventory levels across the sector in the next few quarters, which is likely to lead to revised growth and profit assumptions. Semiconductor companies’ performances are already providing a good indication of what is to come, however, with the semiconductor sector having lost around 37 per cent on the Philadelphia Stock Exchange Semiconductor Index (SOX) since its peak in December 2021; a contraction not seen in that magnitude since the 2007/2008 financial crisis. Despite Samsung and TSMC having announced better-than-expected results, a turnaround in prices is yet to be seen. In the long term, Union Investment experts consider the sector’s prospects to continue to be interesting given the prevailing structural growth trends.

In the consumer-oriented sector, Hugo Boss and watchmaker Swatch have presented solid figures. The lift manufacturer Kone put in less of a good performance with its business having suffered in particular from lockdowns in China. The company has lowered its revenue and profit outlook for this financial year. And in terms of the airlines, Delta Air Lines’ quarterly figures were disappointing in the US, which the company attributed to increased operating costs including higher energy and wage costs.

In addition to cost inflation, exchange rates are another significant factor. Many corporate and analysts’ forecasts have not yet taken the strength of the US dollar into account. The US Dollar Index, which is a measure of the value of the greenback relative to a number of other industrialised countries’ currencies, has appreciated by more than 13 per cent – and against the euro, the dollar has appreciated by around 12 per cent (as at 15 July 2022). This is likely to lead to lower profit expectations for US businesses in the mid-single digit percentage range. The software giant Microsoft had already been forced to lower its outlook for this reason.

In various countries in Europe, the taxing of windfall profits from higher energy prices or in expectation of higher interest rates is being debated more keenly and has already been implemented in some countries. The aim is to redistribute the profits with the additional tax receipts serving to cushion the effect of the rising cost of living for private households. As a consequence, the value of European banking and energy stocks has come under pressure across the board.

  • Current reporting season attracting particular attention

    Global profit revisions signalling weakness

    Global profit revisions signalling weakness
    Source: Bloomberg, Refinitiv, as at 15 July 2022
  • Current reporting season attracting particular attention

    Profit expectations remain stable 'for now'

    Profit expectations remain stable 'for now'
    Source: Bloomberg, Refinitiv, as at 15 July 2022

Consensus forecasts too optimistic

According to the data provider Refinitiv, the analysts’ consensus for 2023 is average profit growth of around 9 per cent for the companies represented in the S&P 500 index. For MSCI Europe, the consensus is just under 4 per cent growth. Union Investment’s strategists consider these bottom-up consensus forecasts to be too optimistic, particularly as margins are expected to widen further in the US. Close to zero growth is more likely, or even potentially a contraction. The first few reports show that the uncertainty surrounding profits is widespread with more profit adjustments on the horizon. Even though prices have recovered, investors should expect the markets to remain in a state of flux.

 

As at 18 July 2022

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